There is something deeply tragi-comedic in Rachel-from-accounts’ announcement that she is “creating” (again, underpants gnome style) a UK “Silicon Valley,” just a day after Chinese engineers ate Silicon Valley’s lunch. The arrival of DeepShit (aka DeepSeek) and Janus Pro 7 took a trillion dollar bite out of the “magnificent seven” tech giants which (with huge central bank backing) have been keeping the western economies on life support since 2008… and with all deflating bubbles, this is likely to be just the first fall down the elevator shaft. A period of “stability” may follow – not least because there are few alternative places for investors to park their wealth. But if the new AI challengers are as disruptive as is threatened, then the monopolistic approach on which US Big Tech has gambled the house is unviable… and sooner or later Big Tech’s AI investors are going to be rushing for the exits.
The UK, of course, was never really in this game. Indeed, as I pointed out last week, for the Labour government, the mythology of AI provides a convenient smokescreen to hide their bankruptcy of ideology… socialism was abandoned decades ago, and post-2008, the globalist (unelected one-world corporate governance) version of neoliberalism has seen an accelerating collapse. Rather than grasp the reality of an increasingly energy-deprived and resource-deprived economy, and the new, increasingly localised economic policy that must result, the Labour government can hide behind the false promise of AI as the deliverer of a return to the debt-based, post-Soviet world of the 1990s.
While the bursting of the AI bubble will be Silicon Valley’s nemesis, in the UK it is in the more mundane sectors of education and local government that we are witnessing the start of a crisis far more profound than anything currently impacting the USA. While establishment media was busy pearl clutching over big losses on the NASDAQ, two seemingly lesser stories broke in the UK. First, was my alma mater announcing big spending cuts, course closures and mergers, and the axing of 400 jobs. Second was Windsor and Maidenhead council announcing a 25 percent increase in the local Council Tax. The announcements themselves are likely opening negotiating positions, with the end result likely to be a little better. But more important here is the wider crisis within which these two situations are merely the early foreshocks.
UK higher education has been a cargo cult since the Blair reforms in the late-1990s. The ridiculous belief being that the more graduates the UK produces, the more graduate jobs will magically appear. Instead (all too predictably) all that happened was “grade inflation” – employers who previously required no more than a good secondary education began selecting only graduate applicants, while roles which previously required people with bachelor’s degrees now select only those with master’s degrees or doctorates. More importantly for the growth of the sector, the introduction of debt into the system turned students into cash cows, to be squeezed until the pips squeaked. This was much more than mere tuition fees, with most universities getting into the property business – either directly or in partnership with the private sector – to provide high-rent student accommodation. Beyond this – at least in the pre-2008 world – the prestige of Britain’s older universities attracted a lucrative influx of full fee-paying international students.
Fast forward to 2025, and Britain’s universities are in trouble. Having borrowed to the hilt in the belief that the student debt boom would grow forever, they face three existential predicaments. First, the simple decline in the under-25 population. There are simply not enough British students to go around. And one result of this is that most universities have been lowering their entry grade requirements in a vain attempt to attract more students. This though, has only contributed to the second predicament… that overseas students no longer value a UK university education on the scale prior to 2008. The education is too expensive, too politicised, and no longer comparable to top-tier universities elsewhere in the world. Nor is it just international students who are making this calculation. Grade inflation and rising costs have caused many within the already smaller under-25 cohort to reconsider the value of a university degree compared to acquiring on-the-job skills in areas such as electrics, plumbing, and carpentry… trades which now offer a higher lifetime income than most university degrees.
The obvious answer to these predicaments – which had been growing throughout the 14 years of Tory misrule – was to accept that the Blair experiment hadn’t worked and trim the higher education sector back to at least its 1980s level. This though, would have come with a huge political cost. Because, whether by accident or design, the expansion of higher education proved to be an exceptional means of hiding youth unemployment… with the youths affectively paying (via student loans) for their own benefits. Closing universities would have created an army of angry youngsters with little allegiance to the current system. And so, successive Chancellors and Education Ministers turned a blind eye in the hope that the crisis would explode on someone else’s watch.
The situation with local councils is more Machiavellian. Since the nineteenth century, national government has been clawing powers away from the local authorities which previously governed Britain, while using spending cuts to exercise more control over them. This came to a head in the 1980s, when several councils, including the Greater London Council, rebelled against Thatcher’s package of cuts and removal of powers which removed any semblance of independence from local authorities. After the defeat of the rebellion – aided by the UK Labour Party – Britain’s councils found themselves saddled with the legal duty to provide statutory services like education, social care, and housing despite no longer having the funds to pay for them.
With the “Big Bang” financial deregulation arriving at the same time, councils across Britain (which retained their borrowing powers) took advantage of seemingly cheap credit to bridge the gap between income and expenditure. And this process was put on steroids by the incoming Blair government whose growth model revolved around “public-private partnerships” to rebuild the UK’s crumbling infrastructure. As with all government borrowing though, the approach can only work so long as the productive economy keeps growing, thereby increasing the income pool upon which taxes can be levied. But when the income dries up – as it was already doing prior to 2008, the only available stopgap is to turn to unproductive growth… i.e., borrowing even more money and then counting its spending as if it was growth. And it (sort of) worked… but only off the back of central banks setting a real-terms negative interest rate.
This was one of many potential problems that the central government should have but didn’t pay attention to before locking down the country in 2020 and 2021 – what might the long-term impact of borrowing and spending billions of pounds to pay firms and workers to be unproductive be? Inflation was easy to foresee, since on opening up again there would be no new goods and services to mop up all of the new currency. Supply system shocks ought also to have been obvious enough – driving prices even higher because the relatively few goods which had been produced were stuck in container ports. The ensuing price spikes, which were particularly severe in import-dependent Britain, would likely have caused budget problems for the UK’s local councils. However, these were as nothing compared to the impact of Bank of England interest rate rises, which sent council debt repayments through the roof.
The obvious “solution” would have been for the incoming Labour government, Trump-style, to simply order the Bank of England to cut rates. Indeed, since the UK government has far more power over the Bank of England than Trump has over the Federal Reserve, this would have been fairly straightforward to do… except that the UK economy couldn’t survive the consequences. For all of the talk about the UK being one of the richest countries on the planet, take away London and the UK is one of the poorest places in Europe. And the only reason we haven’t started eating our pets yet, is due to the massive subsidy that the UK receives from the banking and financial sector in the City of London. Crucially, the ongoing existence of the City of London is entirely dependent upon an overvalued pound… a pound which depends upon relatively high interest rates to attract foreign currency investors. It was the brief loss of this investor income in 2022 which ended Liz Truss’ stint as prime minister. It is the same lack of confidence which recently cast doubt on the viability of Rachel-from-accounts’ budget. More importantly, it casts doubt on the ability of central government to borrow on behalf of indebted local councils, bankrupt universities, or public services generally.
Like Cardiff University, Windsor and Maidstone council is something of an outlier, although most UK councils face the same predicament on a (currently) smaller scale. Windsor and Maidstone has managed to generate a £230m debt (with £18.6m going on interest alone) on an annual income of £127.4m. Several larger councils have bigger debt loads but (for now) enjoy higher income too. Nevertheless, Windsor and Maidstone are challenging government in a way that will impact local government as a whole. This is because, by law, councils must hold a local referendum on proposed tax increases above 4.99 percent. Clearly, hard pressed local residents are unlikely to vote in favour, and so the council faces massive job losses and cuts to services… except… except there is a loophole in the law relating to councils which have issued a Section 114 order (the nearest a council can come to bankruptcy). In this case, central government can allow the tax increase without a referendum… which is what Windsor and Maidstone are asking them to do. But they go much further. In addition to the proposed tax increase, they are asking for a £60.3m loan from the UK government – in effect, asking the government to borrow £60.3m on their behalf.
Okay, an additional £60m in government borrowing is hardly going to reignite the recent bond crisis. But what will, is the understanding that if the government gives in to Windsor and Maidstone, it will also (try to) give in to all of the other bankrupt councils in the UK – particularly the Labour governed ones. So that extra borrowing of a few million could quickly spiral into billions.
Nor, necessarily, can councils continue to plug the gaps through tax increases. The largely hidden predicament in the post-lockdown/post-sanctions age is that there is not enough money to go around. The people who council finance directors blithely assume are going to stump up 25 percent more in taxes next year, are still reeling from the massive price spikes of the past three years. And while some wages in some sectors have begun to claw this back, most of us have had to make some hard decisions about where to cut our spending. So that what the council gains in increased taxes may well be lost in business closures, resulting in less income from business rates in addition to a bigger pool of unemployed people qualifying for reduced taxes and more council services.
Central government – although it is too IQ-deficient to know it yet – has the same problem. Squeezed incomes and growing business insolvencies point to a shrinking tax base just as the cost of government borrowing is growing, and as foreign investors sense that the UK government cannot hope to raise the taxes needed to repay its debts. Nor does direct currency-printing solve the problem (although I expect it to be tried) because it simply lowers the value of the pound, making Britain’s imports even more expensive, and risking foreign investment flight.
Which is why UK government ministers are currently rain dancing like so many ancient shamans in the desperate hope that “growth” will rain down upon us before the economy falls over. Given, however, that most of the wrong turns were taken decades ago, and that few of the preconditions for growth are in place anymore, Britain faces a serious reckoning in which much that we currently take for granted (including most higher education and local services) will go the way of the dodo, before any economic revival is possible. And it is far from clear that anyone in Versailles-on-Thames has the first idea of how deep and how unpleasant that reckoning is likely to be.
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